Can Innovation Save China?

Raymond ChangMarch 18, 2016

For decades, China has thrived by serving as manufacturer to the world and adapting foreign products for its huge local market. With its economy slowing, can entrepreneurs serve as an engine for innovation and growth? Investor Raymond Chang ’96 discusses the opportunities and bottlenecks facing new businesses.

In the fall of 2015, Chinese Premier Li Keqiang visited the high-tech zone of Dalian and spoke about the importance of innovation and entrepreneurship for the country’s future. Xinua, the Communist Party’s official news agency, reported that Li said, “The competitiveness of companies will take a leap forward with the increase of each weight of innovation.” It seems that everyone from the Communist Party to private investors agrees on this point.

The conventional view has been that Chinese companies are good at adapting ideas from other regions to the Chinese market but not at creating new business ideas that sweep outward from the Middle Kingdom. Some of the most successful Chinese firms—Alibaba, Tencent, Baidu, Xiaomi—can be seen as local answers to Amazon, Facebook, Google, and Apple.

However, this formulation misses important aspects of those companies’ success. For instance, Tencent’s main product, WeChat, is far more than just a copy. Amy Wilkinson, a lecturer in management at the Stanford Graduate School of Business, recently told NPR, “It's an unbelievable innovation platform where you could order a car, find a date, make a doctor's appointment, order food, track your fitness goals. It is really ahead of the United States in many ways.”

A report by Erik Roth, Jeongmin Seong, and Jonathan Woetzel in McKinsey Quarterly found that Chinese companies were strong innovators in consumer electronics and manufacturing, but less so in science-based innovation. “China has the potential to evolve from an innovation sponge—absorbing and adapting global technologies and knowledge—to an innovation leader,” they write.

Looking at this challenge another way, Foreign Affairs pointed out that South Korea and Japan both moved from “low-end, first-generation exports to high-end, second-generation exports” faster than China has. “Chinese companies have been slow to develop upstream skills, which partly explains why their success in capital-goods and high-tech markets has been uneven and why it’s unclear how soon they will be able to move from the lower end to the higher end of those sectors.”

Raymond Chang, an active angel investor and CEO of RTC3 Capital Shanghai, sat down for an interview with Yale Insights to talk about what it will take to move Chinese entrepreneurship forward. “In order to really have a breakthrough on innovative entrepreneurship there needs to be a true disruption in the system,” he said. “You need to have a political system that supports it. You also need a different tier of financing structure to support the growth of innovative entrepreneurship.” He sees challenges due to weak intellectual property protection, a court system that isn’t always fair, and capital that backs big firms but not the earliest stages of startups.

Chang noted that China’s longstanding manufacturing prowess can itself be a source of breakthroughs. That might mean efficiency-driven innovation along the supply chain or advancing techniques such as rapid prototyping, mass customization, or flexible automation. Additionally, ecommerce and mobile have already shown their capacity to scale innovations. He cited WeChat’s large subscriber base and focus on mobile payments and mobile commerce, and pointed to the example of Singles’ Day, a celebration for the unattached that has turned into a shopping holiday. In 2015, the day saw more than $15 billion in sales and over 500 million items shipped within 96 hours, dwarfing Cyber Monday’s $1.35 billion.

Chang sees a shift in how the government views the private sector. Top officials, he suggested, are looking beyond the long-favored state-owned enterprises and toward the private sector for help in solving some of the country’s social and environmental challenges. “Finding a way to work with innovative private companies may be the way for the future.”